It's early days, but June markets already look set to swoon.
Stocks Tuesday opened wobbly as global equities markets sold off on worries about China's growth, euro debtors and the state of the economic recovery. But a flurry of good, though dated, economic headlines on U.S. manufacturing and construction put some bounce back into stocks.
That rally didn't hold, and stocks sold off into the close on news the government launched a criminal investigation into British Petroleum's Gulf of Mexico oil spill. BP stock lost 15 percent, and was under selling pressure all day after its failed weekend effort to control the flow of oil into the gulf.
The Dow was down 112 at 10024, and the S&P 500 was down 18 at 1070. Energy shares were the worst performers, down 4.25 percent, followed by materials, down 3.1 percent. Consumer staples were the best S&P sector, down just 0.2 percent. The sell off sent buyers into Treasurys, where yields fell late in the day.
Wednesday's markets are already getting primed for Friday's May jobs report. Challenger's data on job cuts is released at 7:30 a.m. (ADP's payroll data, usually released Wednesday, was postponed until Thursday due to the shortened holiday week) There is also pending home sales data at 10 a.m., but the big ticket item will be May auto sales, expected to come in at annualized sales rate of 11.4 million.
Some traders are watching the 1065 to 1075 level on the S&P 500 as an important area of support, and it settled firmly in the center of that range at the close Tuesday. "Technicals seem like what is driving it right now. If they're (key levels) close enough, we're going to tap them," said Wells Capital Management chief investment strategist Jim Paulsen. "Fundamentals aren't even in play here."
Paulsen said 1040, the recent low, is the level being closely watched to see if there will be a retest. He said the market is overreacting to the European news, and his feeling is the May 6 "flash crash" is to blame since the rapid drop in stocks may have encouraged investors to believe the worst about the sovereign debt crisis.
He said markets have gotten to the point where they can determine conditions, as opposed to when they used to reflect them. "What does scare me is that the markets are supposed to reflect the situation on Main Street," he said.
Nonetheless, Paulsen said the stock market was due for a correction and it's not clear how much lower it will go. "We need to settle in here," he said. "We need those weekly (jobless claims) numbers to go down." Weekly jobless claims, reported Thursday, are watched closely by the market and have stayed persistently in the mid 400,000 level.
As for the monthly employment report, the current estimate for May non-farm payrolls is more than 500,000, and that number includes as many as 300,000 temporary census workers.
The ISM manufacturing survey for May came in at a strong 59.7 Tuesday, slightly below April's level. Pimco's Tony Crescenzi points out that the supplier delivery component of the survey was an elevated 61 in May, also a bit below April's level. He said it is rare for that number to be above 60, as it has been for five straight months now. High readings in that number shows that a higher proportion of the survey's respondents are making slower deliveries.
"This is important because broad slowing in delivery speeds tend to coincide with relatively strong monthly increases in non-farm payrolls," he wrote in a note.
Crescenzi, strategist and portfolio manager, said in a phone interview that it's not clear from the current data whether the economy is feeling any ill effects from the European debt crisis because the change in financial conditions is too current.
"We've had this pressure building up that would lead to job growth. We're probably in our fifth month. Then there's this interruption which some say could create a sudden stop," he said.
However, he said it's still not clear whether the European debt crisis will lead to a "stop." "If you look at CEOs and their actions, it doesn't seem they're deterred about the idea of recovery and expansion, but when you listen to them talk, they say they're watching it," he said.
Crescenczi said the Friday jobs data also won't show impact from Europe. "Even with a good number, it will be watered down..it's just that we might be living in a difference economic climate now. We just don't know," he said.
"Even if financial conditions have tightened lately, they're still much looser," than the 2008/2009 period. "Credit spreads were far wider then and equities prices are much lower...Uncertainty is one of the most important things here," he said.
What Else to Watch
The Financial Crisis Inquiry Commisssion hears from Warren Buffett, among others Wednesday morning, as ratings agencies face scrutiny. Buffet is one of the biggest investors in Moody's.
The SEC holds a roundtable on market structure, including the topic of high-frequency trading.
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